Have the 1970s made a comeback?
This question is triggered by rising inflation rates and the hardships they cause. Inflation rose to 9.1% in June, according to the Consumer Price Index. The Federal Reserve has a target inflation rate of 2%. A big miss on inflation is bad news for the public.
Unless incomes and wages rise above inflation, the public will be worse off and forced to make tough decisions at home. Unpredictable and rising inflation acts as a tax on household budgets, reducing well-being and disproportionately harming those with lower incomes.
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Troubles caused by hyperinflation cause flashbacks to the 1960s and 1970s, a time of inflation and persistent unemployment.
The “misery index,” which measures inflation and unemployment levels, rose from 11.67% in 1970 to 21.9% by 1980.
Through many crises, including the stock market crash of 1989, the 9/11 attacks, the Great Recession and the COVID-19 pandemic, the “misery index” has never reached its 1970 peak. But from 2015 to 2019 it has increased from 5% level to 12.7% now.
In contrast, the economy was strong before the COVID-19 pandemic. Inflation was low as was unemployment. Unemployment for blacks and Latinos is at an all-time low. The overall unemployment rate rose to 14.7% in April 2020 during the peak of the pandemic, but employment has recovered as the economy has reopened.
Low unemployment rates represent a major difference between today’s economic conditions and the era of the Great Inflation, the period of the 1960s and 1970s as it is now known.
To be sure, there are some high-level similarities in terms of policy, thanks to the federal government’s response to the pandemic. The global pandemic affected all areas of life, including work, school and grocery shopping. Supply and demand have been globally upset by supply chain constraints, manufacturing issues and transportation delays. The results left grocery stores with empty shelves, confusing consumers, and shortages of all kinds of goods, including toilet paper, coins, computer chips, lumber, and ketchup. And the federal government responded with radical changes in fiscal and monetary policies.
Similarly, it is now commonly believed that the Great Inflation was caused by an increase in the money supply outstripping the demand for money. Economic officials and central bankers at the time, encouraged by the belief in a stable “Phillips curve”—that is, the relationship between inflation and unemployment—thought they could trade high inflation for low unemployment and a strong economy.
Prevailing Keynesian economics struggled to explain when high inflation was coupled with rising unemployment – unemployment – stagnation -. Later Nobel laureate economists Milton Friedman and Edmund Phelps explained that the Phillips curve was not constant and instead advocated a “natural” unemployment rate with constant inflation. By trying to reduce inflation, the Fed causes more inflation.
Then, as today, a complicating factor in understanding inflation was the high prices of oil and natural gas and growing demand in the post-World War II era.
Confused by supply-side factors and ignorant of the Fed’s critical role in controlling inflation, the Nixon administration scrambled for solutions, removing the gold standard in 1971 and using wage and price controls to moderate price increases, but this only led to deficits and rows. Problems continued under President Gerald Ford, who turned to the public, not the Fed, to stop inflation, calling for a grassroots movement to “whip inflation now.” Stagflation and a high “Misery Index” ultimately doomed President Jimmy Carter. A sustained effort to tighten monetary policy by dramatically raising interest rates under Fed Chairman Paul Volcker, supported by President Ronald Reagan, finally brought down inflation in the early 1980s.
The financial situation facing the public now bears few similarities to that of the 1970s. High relative levels of inflation, rising energy prices due to the global pandemic, and Russia’s invasion of Ukraine led to energy restrictions and changed trade and production patterns in oil and energy.
Labor market distortions are different. The 1970s were marked by persistent unemployment problems, but US labor markets today have weathered major shocks, recovered quickly, and still show no signs of weakening. Just because unemployment is as low as it was before the pandemic, that’s not to say the US is stagnating.
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Furthermore, the current Fed Chairman, Jerome Powell, has clearly stated that the central bank is responsible for the price level, that inflation is “too high” and that the Fed must do what is necessary to reduce inflation. Central bank and top academic and business economists no longer suffer from the confusion about inflation that bedeviled the profession in the 1970s.